Mexico’s Rising Foreign Direct Investment

Recent economic developments have led Mexican officials and foreign rating agencies to revise their forecasts upward for 2010. As greater levels of foreign investment bring new businesses and travelers, Mexico’s hotel industry stands to gain.

Oct 26, 2010

By Jane Rogers

Reflecting a return to a stable post-NAFTA trend line for foreign direct investment, Mexico’s economic minister, Mr. Gerardo Ruiz, announced that foreign direct investment (FDI) is expected to rise to between $17 and $20 billion USD in 2010, an increase over earlier forecasts of between $15 and $17 billion USD. This optimism is supported by Mexico’s leap in ranking on A.T. Kearney’s 2010 FDI Confidence Index.

Despite a number of challenges in recent years, including the worst recession since the 1930s, declining oil production, and government efforts to curtail drug-trafficking crime in certain areas, Mexico was ranked eighth among the top-ten most attractive markets to foreign investors, a dramatic improvement over its 19th-place ranking in the 2007 index. The country remains a popular location for light industry and for U.S.-based companies looking to reduce costs. Increasing FDI and the resultant expansion of business travel is expected to increase lodging demand throughout the country, which is currently underserved by branded, business-oriented hotels.

The following table shows the net foreign direct investments in Mexico by home country between 2005 and 2009.

Figure 1Net Foreign Direct Investment Inflows by Home Country (Millions of Dollars)

Country

2005

% of Total

2006

% of Total

2007

% of Total

2008

% of Total

2009

% of Total

United States

$11,638

53.09

$12,431

64.36

$11,577

42.44

$8,938

40.72

$5,811

50.89

Spain

1,190

5.43

1,592

8.24

5,200

19.06

4,322

19.69

630

5.52

Canada

450

2.05

539

2.79

659

2.42

2,361

10.76

1,034

9.06

United Kingdom

1,310

5.98

1,261

6.53

565

2.07

1,387

6.32

428

3.75

The Netherlands

2,437

11.12

2,742

14.20

4,363

16.00

1,158

5.28

1,461

12.80

Others

4,897

22.34

750

3.88

4,913

18.01

3,785

17.24

2,054

17.99

Total

21,922

19,315

27,277

21,951

11,418

Source: Economic Commission for Latin America and the Caribbean

The United States remains the predominant source of foreign investment in Mexico. Canada’s investment levels rose each year between 2005 and 2008, and even though investment fell more than 50% in 2009, Canada accounts for nearly 10% of Mexico’s total FDI. Together with the U.S., this underscores the importance of North American sources of investment in the country.

While the emerging markets of China and India ranked higher on the A.T. Kearney Index, Mexico retains a “near country” attraction for North American investors. For example, in a September 2010 announcement, lower shipping costs and a streamlined supply chain were cited as major factors in Tennessee-based Meco Corporation’s decision to move some of its manufacturing operations from China to Saltillo in the state of Coahuila. Another recent announcement is for the construction a $550-million Volkswagen factory in Silao, Guanajuato that would build automobile engines for shipment to assembly plants in Chattanooga, Tennessee and Puebla, Mexico. Reported factors in that decision included lower production costs, availability of land, and the existence of an industrial zone in Silao. Mexico’s numerous free trade agreements, including the North American Free Trade Agreement, have also helped draw investment to the country. Another positive indicator is Mexico’s country risk ranking of 157 points as of October 6, 2010, as reported by Banamex. This ranking, which takes into account various elements of economic risk, is well below that of Argentina at 633 points and Brazil at 200 points.

The following table shows how Mexico’s net foreign direct investment is divided among the top-three sectors.

Services (the sector to which hotels and the hospitality industry belong) has, since 2007, overtaken the manufacturing sector as the leader in terms of total inflowing FDI. As investment levels begin to increase and economic growth resumes, the demand for lodging is also expected to rise. According to the Secretary of Tourism, the Mexican federal government has invested more than $3 billion USD into new tourism projects. Additionally, the private sector invested more than $1.8 billion USD between January and June of 2010, of which 11.6% was from foreign investors. Of the 402 projects reportedly under development, more than half are located in the center of the country, reflecting the need for quality lodging facilities to serve Mexico’s business and industrial centers.

An upcoming article will examine the impact of Mexico’s rising FDI on the country’s lodging industry, particularly with respect to branded hotels. But from a macroeconomic perspective, it’s clear that foreign investors consider Mexico a safe and prosperous place for their dollars, a trend that should continue and strengthen as economies the world over rebound in the next several years.

For more information on hotel and resort investments and development in Mexico, please contact Jane Rogers at jrogers@hvs.com or 214-724-7995.

1 Comments

Great article!
We are attempting to track the foreign investment into Mexico by studying selected measurements, such as: a) origin of inbound flights-visitors, b) visas-population, c) stock market investments-investors, and d) origin of foreign-owned companies in Mexico. It would be interesting to see if these are positively correlated and/or reveal any insight regarding the evolution from tourist to investor to resident/owner. Our hypothesis is: a) investment in Mexico real estate has historically been driven largely by U.S. investors, b) consensus seems to be that if U.S. is out of the market then mexico real estate is a poor investment, c) we believe investors/capital from emerging markets and Canada will fill this void if properly exposed to the opportunity, however Mexico has become complacent in getting it's message out to the rest of the world as the U.S. market has always been there....Interested in your thoughts/ideas...Eric

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